MADRID (Reuters) - A quarter of a million Spaniards ditched their mobile phones in September, with Telefonica (TEF.MC) and Vodafone (VOD.L) bearing the brunt of cancellations by recession-hit consumers.

Spain's telecoms watchdog said on Thursday mobile phone connections fell 242,000 in the month, the eighth consecutive decline in a country at the forefront of the euro zone debt crisis and where one in four of the workforce is unemployed.

The decline is bigger than the 226,000 connections cancelled in August, though below April's record of 380,000.

Since September, both Telefonica and Vodafone have announced cheaper tariffs in an escalating price war between Spanish operators.

Many cash-strapped consumers have been switching from big players like Telefonica's Movistar to smaller firms offering cheaper deals like Teliasonera's (TLSN.ST) Yoigo.

"In line with previous months, the declines registered by Movistar and Vodafone were not outweighed by the increases at other mobile operators," the regulator CMT said in a statement.

Telefonica and Vodafone had used Spain as a testing ground for scrapping smartphone subsidies and stopped offering customers cut-price or free phones earlier this year.

Vodafone said this week it would bring back subsidies, leaving Telefonica as the only player on the market not offering customers discount handsets on a general basis.

Telefonica, the biggest telecoms company in Europe by revenue, reported nine-month results on Wednesday that showed Spain was a drag on the business, with total customers in its home market down 7.5 percent in the third quarter.

Telefonica launched a "Fusion" package last month, bundling fixed line, mobile, internet and television services in a bid to fight off competition from low-cost rivals.

Telefonica Europe head Eva Castillo said 430,000 customers had signed up for Fusion but declined to say how many came from the company's existing customer base. She vowed the company would not reintroduce subsidies.

Smaller rival Jazztel (JAZ.MC) last month offered a smartphone worth more than 200 euros for 5 euros a month if clients took a combined fixed and mobile package.

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